You guys have been busy this weekend!! Here's my 10c worth.
Let’s assume 45 million shares at $2.50-$2.60 is correct. That’s around $115m. They obviously might want to accelerate exploration, will face upfront fees and bank guarantees re infrastructure access and have to finance pre-feas/bank feas etc.
Let’s keep $15m back for “other stuff” (combined with existing cash of $9m = $24m) and call it $100m available for capex. Remember also that this is the equity injection into a project that you would typically expect to be matched, shortly thereafter, by debt. So we are looking at a potential expenditure of around $200m on a project, assuming a 50% gearing ratio. You can only raise that much money if you can identify fairly certain future cash flows. Options include:
1/ Small startup operation: Fairly low risks/certain cash flows associated with a DSO trucking operation. While profit will depend on distance trucked, the net profit from two years of a 2mtpa trucking operation is $93m (refer p7 Paterson report - NP = $54mpa at 2mtpa). On the surface, these returns would hardly justify a $100-$200m capex. On the other hand, the payback is around 4 years, in which case you might consider it if your worst case scenario for BRM was a long-term trucking operation.
2/ Larger startup operation: It is possible that BRM have fairly advanced rail negotiations and that the startup operation could increase slightly from 2mpta (if via FMG) or greatly (if via BHP). This might justify a greater initial capital outlay, given greater cashflows. It would be very aggressive for BRM to commit $200m capex toward a phased outlay of around $750m for their major DSO operation. Reasons: They have not completed a bank feasibility, their existing modeling is very rough (+-30% error on capex) and they do not have 10mpta transport.
3/ Infrastructure deal: BRM have set a target for infrastructure agreements to be completed by 2H08. Picking up on points made by Westcott, the whole point of access arrangements is that the cost of expensive infrastructure is shared, leading to efficiencies. The BRM Roadshow presentation makes a deal of the “NEW NWIOA Port Facility” and refers to “Third party infrastructure access agreements proceeding –State and Federal Government support and Port Authority commitment to a Port Infrastructure solution (NWIOA Submission).” (slide 30). A press clipping re NWIOA states “"We've come together and working as one to put the economies of scale together that give us in excess of 45 to 50 million tonne future capacity and that's a nominal capacity that everyone looks for in the way of equipment, car stackers, dumpers, ship loaders and profitable haulage. So by working together as an aligned group we can obviously move forward in a simliar vein to a major expansion or a major player." Paterson valuation p3 states option 1 BHP haulage to port requires construction of standalone port facilities, likely funded by Alliance members. Patersons put port infrastructure cost at $100m and rail at $50m (some at Marillana and some at port).
Thus, a consideration is that the Alliance may commit funds toward port infrastructure and exchange access with a rail provider. Additionally or alternatively, BHP might value the BRM proposed and financed car dumper on their track – facilitating a sharing arrangement between providers. There are way to many permutations and combinations to even sensibly try to guess what $100 - $200m could be spent on by BRM. My only point is that while paying an access charge is the simplest way of getting rail access, investing in someone else’s infrastructure or exchanging infrastructure access with something they may want is a superior strategy in a constrained infrastructure environment. Patersons argue access seekers will have to pay to remove bottlenecks on the main trunkline. I find that highly unusual. I accept stranded asset risks on spur lines might require third party capex, but IMO and experience, rail providers like to keep a clean ownership stake in the main trunkline. They would remove the bottlenecks and recover costs from take or pay contracts backed up by bank guarantees. This is preferable to messy ownership legalities or overly long contract commitments made in exchange for capital contributions. Maybe they do things differently in WA. Don’t know.
Its all guess work until the announcement, but it still pays to think about the issues and risks.
BRM Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
